In a vigorous defense of retirement security, NYSUT and the state AFL-CIO are mounting an aggressive campaign to tell lawmakers they must say no to yet another pension tier. The campaign also educates the public by dispelling myths about defined benefit pensions. Several fliers featuring NYSUT retirees and other retired public employees put a face on retirement security. A video and other materials are in the works.
Just two years after New York state instituted Tier 5, Gov. Cuomo is pushing to further diminish benefits with Tier 6. The new proposal would allow future employees — our children and grandchildren — to choose between a traditional, albeit severely reduced, defined benefit plan or a defined contribution, 401(k)-like option that would erode the next generation's retirement security and jeopardize the pension systems' longterm health.
"Contrary to the rhetoric, New York state's public pensions help strengthen the state's economy, create jobs and cost less to run than 401(k)-type plans," said NYSUT Executive Vice President Andy Pallotta.
Pallotta, backed up by state AFL-CIO President Mario Cilento and state Comptroller Thomas DiNapoli, warned that Cuomo's latest proposal "would endanger the current workforce, as well as the pensions of retired public employees."
Our state pension systems are well-funded and stable. Both the Pew Center on the States and Governing magazine ranked New York ahead of the curve, with the country's strongest public pension systems.
Tier 6 not a solution
In a strong defense of defined benefit plans, DiNapoli recently made the case for maintaining a system that benefits workers and the state. "The solution to dismantle current defined benefit plans long term is not a solution; in fact (it) could create more challenges and costs down the road," DiNapoli said at a National Public Pension Coalition meeting.
Opponents of New York's current system often point to recent increases in employer contribution rates for the state's Teachers' Retirement System as an example of rising costs. Conveniently left out of the discussion is the fact that employer contributions have been in the single digits since 1989, with six years of payments at less than 1.5 percent of payroll.
The largest pension contributions continue to come from investment income. In 2011, for example, 90 cents of every pension dollar paid out through TRS came from investment income. The same holds true for the State and Local Employees Retirement System (ERS).
"Over the past 20 years, 83 cents of every dollar in benefits paid to New York retirees have come from investment returns, not employee or employer contributions," DiNapoli said.
State plans are also funded by employee contributions. And with the introduction of Tier 5, which lawmakers said would reflect a cost savings of more than $35 billion over 30 years, state and local workers are contributing even more to the retirement systems.
Under Cuomo's Tier 6 proposal, public employees' contributions would go up even further. Lifetime employee contributions would vary from 4 to 6 percent; state workers, including educators, would have to work 12 years to be fully vested; retirement age would be increased to 65; and pensions would be based on a five-year final average salary.
By no means lavish, "pensions offer stable retirement benefits that are paid for largely through investment gains — not taxpayer dollars," Pallotta said.
Pensions bolster economy
The AFL-CIO's Cilento cautioned against the widespread mischaracterization of pensions as overly generous. More than 75 percent of pensions for members of ERS, for example, are less than $30,000 per year. Those funds, meanwhile, benefit the economy as a whole.
Retirees spend their money in their communities, supporting local businesses and supporting jobs," Cilento noted in a recent Buffalo News column. The Tier 6 proposal would reduce public employees' retirement income by calculating every year of credit at 1.67 percent — regardless of years of service.
Cuomo's 401(k)-like proposal could seriously undermine the stability of the retirement systems. Employers would contribute at least 4 percent and vesting would take one year.
The more new employees who choose a 401(k)-like option, the less income goes into the retirement systems. And employees would be no better off.
"401(k)s were never intended to replace pensions," DiNapoli said. "They were designed as a saving mechanism to supplement Social Security and pension income, and I think they have certainly proven inadequate to provide retirement security." A National Institute on Retirement Security study found traditional defined benefit pension plans operate at nearly half the cost of 401(k)-type plans.
And according to the Society of Professional Asset Managers and Record Keepers, the average 401(k) balance is just over $45,000; 43 percent of 401(k) accounts have a balance of less than $10,000.
Another troubling aspect of the Cuomo plan: New employees, upon their hire, would have only 30 days to elect which system to join; the decision is irrevocable.
"Enough is enough," Pallotta said. "Current and future public employees — just like all workers in the private sector — should have a measure of retirement security. This plan does the opposite."